The Expert View: Aviva, Sainsbury's and Lloyds

Our daily round-up of analyst recommendations and commentary, featuring Aviva, Sainsbury's, Lloyds, Travis Perkins and Debenhams.

Key stats
Market capitalisation	£10,989m
No. of shares out	2,918m
No. of shares floating	2,912m
No. of common shareholders	not stated
No. of employees	36562
Trading volume (10 day avg.)	8m
Turnover	£36,003m
Profit before tax	£483m
Earnings per share	16.68p
Cashflow per share	34.47p
Cash per share	793.02p

*Correct as at 9 Jan 2013

Barclays downgrades Aviva on dividend fears

Alan Devlin, analyst at Barclays Capital, has downgraded composite insurer Aviva (AV.L) to ‘underweight’ from ‘equal weight’ over concerns about its ability to deliver sustainable earnings and dividend growth.

'We believe one of the biggest challenges facing the new Aviva CEO [Mark Wilson] is setting a sustainable dividend level,' Devlin said. 'Our analysis shows that the complex structure of the Aviva group hampers its ability to upstream dividends from its cash generative UK general insurance operations, limiting its capacity to fund group dividends.' He believes Aviva could cut its 2013 shareholder payouts by 15%.

Other analysts, meanwhile, focused on Aviva's disposal yesterday of its remaining 19.4% stake in Dutch insurer Delta Lloyd, welcoming the ongoing efforts to sell or close a quarter of the group’s underperforming businesses.

Kevin Ryan of Investec said the disposal had a limited balance sheet impact, but provided ‘further evidence of the determination to restructure’.

Shares in Aviva closed at 373.96p on Wednesday, down 7.9p or 2.1%.

Key stats
Market capitalisation	£6,253m
No. of shares out	1,888m
No. of shares floating	1,650m
No. of common shareholders	not stated
No. of employees	48800
Trading volume (10 day avg.)	5m
Turnover	£22,294m
Profit before tax	£598m
Earnings per share	31.51p
Cashflow per share	56.85p
Cash per share	39.24p

*Correct as at 9 Jan 2013

Seymour Pierce downgrades Sainsbury's to 'reduce'

Kate Calvert, analyst at Seymour Pierce, has downgraded Sainsbury's (SBRY.L) from 'hold' to 'reduce', expecting the supermarket to suffer as Tesco's fights to recover after last year's surprise profit warning.

In the 14 weeks ending 5 January total sales growth including petrol hit 3.9% year-on-year, with like-for-like sales excluding petrol up 0.9%. Consensus expectations were 1% growth, which was trimmed from 1.5% in the New Year amid reports that sales were on the light side.

Based on the figure Calvert has trimmed her 2013 pre-tax profit forecast 2.5% to £730 million. 'While a very well-run business, we are also cutting our recommendation to Reduce from Hold (Hold since 30/9/11),' the analyst said.

'We suspect Sainsbury will struggle to outperform in 2013 as Tesco continues its fight back and there is some margin vulnerability as momentum slows.'

Shares in the group closed at 330.6p on Wednesday, down 8.4p or 2.5%.

Key stats
Market capitalisation	£38,025m
No. of shares out	70,424m
No. of shares floating	42,554m
No. of common shareholders	not stated
No. of employees	120449
Trading volume (10 day avg.)	91m
Turnover	£26,316m
Profit before tax	£-2,787m
Earnings per share	-4.07p
Cashflow per share	-0.90p
Cash per share	88.25p

*Correct as at 9 Jan 2013

UBS upgrades Lloyds to 'buy'

John-Paul Crutchley, analyst at UBS, has upgraded Lloyds (LLOY.L) from 'neutral' to 'buy', saying the taxpayer-bailed out bank is the best placed of the UK's high-street institutions to capitalise on a softening regulatory agenda.

Recent developments such as the appointment of Canadian Mark Carney to become the next governor of the Bank of England, easing liquidity rules and moves to encourage UK banks to run down their excess cash reserves lead Crutchley to believe the regulatory grip is loosening, and Lloyds is the bank that will make the most of this opportunity, he said.

'In our view, Lloyds investment strategy is simplest of the UK domestic banks. The story is defined with the group focused on execution,' he said. 'In our view, Lloyds is clearly going to deliver rising margins, falling costs and falling [bad loan] provisions which should provide a very strong upswing to profitability and earnings per share momentum over the next few years.'

Crutchley raised his target price for the shares from 50p to 60p, based on his estimate of a 13% sustainable return on equity generated by the core business.

Lloyds shares closed on Wednesday at 53.22p, up 2.4p or 4.6%.

Key stats
Market capitalisation	£2,848m
No. of shares out	244m
No. of shares floating	224m
No. of common shareholders	not stated
No. of employees	21423
Trading volume (10 day avg.)	0m
Turnover	£4,779m
Profit before tax	£212m
Earnings per share	87.33p
Cashflow per share	118.91p
Cash per share	33.09p

*Correct as at 9 Jan 2013

Liberum says Travis Perkins is one to watch in 2013

Charlie Campbell, analyst at Liberum Capital, says the potential of builders' merchant Travis Perkins (TPK.L) continues to be overlooked by investors, and he reiterated his 'buy' recommendation.

'We believe that Travis Perkins is being ignored by the market,' Campbell said. 'The industry fundamentals are strong and continue to allow the big to get bigger, there are signs of life in the end markets, the company has a de-geared balance sheet and the new finance director is a high calibre new recruit.'

Campbell said balance sheet redeployment would add 150p-210p to his £12.80 target price, and a full recovery could take the shares to £18.

'We estimate that Travis Perkins is trading at around 11x 2013E price to earnings, which looks unambitious, while the enterprise value to sales multiple of 0.63x does not adequately reflect the 7% margin expected in 2013, or potential recovery to 8%,' he concluded.

Shares in the group closed at £11.64 on Wednesday, up 46.4p or 4.2%.

Key stats
Market capitalisation	£1,327m
No. of shares out	1,263m
No. of shares floating	1,145m
No. of common shareholders	not stated
No. of employees	8355
Trading volume (10 day avg.)	4m
Turnover	£2,230m
Profit before tax	£125m
Earnings per share	9.77p
Cashflow per share	16.92p
Cash per share	3.48p

*Correct as at 9 Jan 2013

Investec trims target price for Debenhams, remains bullish

Bethany Hocking, analyst at Investec, has reduced her target price for Debenhams (DEB.L) having reviewed her gross margin projections, but she still backs the group with a 'buy' recommendation.

Following the Christmas trading statement and subsequent conference call, Hocking's 2013 gross margin projection falls from +23 basis points to +12 points, which has a 2% negative impact on her 2013 pre-tax profit forecast. The analyst's target price subsequently falls from 135p to 130p.

Sales via the web are looking strong, Hocking noted: 'Online was very strong, +39% for the 18 weeks (to 12.6% of sales), and +45% in December, over twice the industry rate.' However, with this sales channel typically lower margin, this structural trend is a double-edged sword.

Nonetheless, Hocking said the 9.6x forecast earnings valuation still looks too cheap.

Shares in the group closed at 106.5p on Wednesday, 1.6p or 1.5%.